Rc v. Teh Comissioner Of Income Tax A.p-I Hyd

* HONOURABLE SRI JUSTICE L. NARASIMHA REDDYANDHONOURABLE SRI JUSTICE T. SUNIL CHOWDARY + REFERENCE CASE No.82 of 1999 % 12-06-2014Between:# M/s. Priyadarshini Spinning Mills Ltd.,Hyderabad … ApplicantAnd $ Commissioner of Income-tax AP-I, Hyderabad … Respondent! Counsel for the Applicant : Sri S. Ravi^ Counsel for the Respondent : Sri S.R. Ashok <Gist : >Head Note : ?Cases referred : 1969 AIR 267 HONOURABLE SRI JUSTICE L. NARASIMHA REDDYANDHONOURABLE SRI JUSTICE T. SUNIL CHOWDARY REFERENCE CASE No.82 of 1999 JUDGMENT:(Per Hon’ble Sri Justice L. Narasimha Reddy) The Finance Act, 1998 brought about substantial changes in theIncome Tax Act, particularly, in the regime of depreciations. Till then, depreciations used to be allowed on individual assets, held by anassesee, whether an individual or an industry or a business undertaking. Through the amendment, the concept of ‘block assets’ was introduced. The expression ‘block assets’ is defined under Section 11 of Section 2 ofthe Income Tax Act, 1961, (for short ‘the Act’) as, pool of tangible assetssuch as buildings, machinery, plant or furniture on the one hand andintangible assets such as patents, copyrights, trade-marks, licences,franchises etc., on the other hand. One condition for grouping such itemstogether, is that the rate of depreciation must be same for the items to beincluded in each block. Section 43 (6) of the Act provided for working outof “Written Down Value (WDV)” as a step in the process of determiningthe allowable depreciation. The procedure to workout WDV in respect ofblock assets is prescribed under clause (c) therein. 2. The applicant submitted its returns for the assessment year1988-89. It was mentioned that certain items, which formed part of ablock assets, valued at Rs.68,06,562/- were destroyed in a fire accident. It was also stated that the applicant has taken out Reinstatement Valueinsurance policies and accepting the claim submitted thereunder, theinsurer paid a sum of Rs.1,54,99,051/-. They, however, deducted only asum of Rs.68,06,562/- in the process of working out the WDV, andaccordingly, claimed deprecation, in accordance with the relevantprovisions. The Assessing Authority, however, passed an order, dated20.03.1991, stating that irrespective of the WDV of the destroyed items,the amount that is received on the basis of the insurance claim must betaken into account and deducted. Not satisfied with that order, theapplicant filed an appeal before the Appellate Authority. Through itsorder, dated 23.11.1993, the appellate authority accepted the contentionof the applicant and restricted the deduction from the WDV only to theextent of Rs.68,06,562/-. Assailing the order of the appellate authority thedepartment filed an Appeal before the Income Tax Appellate Tribunal (forshort ‘the Tribunal’). The applicant also filed appeal, canvassing certain aspects. 3. The Tribunal passed a common order, dated 12.07.1996,accepting the contention of the department and repelling the one urged bythe applicant. Thereupon, the applicant filed application under Section256(1) of the Act with a request to refer the relevant questions to thisCourt for answer. After hearing both the parties, the Tribunal framed thefollowing questions and referred the same to this Court: “AT THE REQUEST OF THE REVENUE 1. In the facts and circumstances of the case and whileapplying the provisions of S.43 (6) (c) (i) (B) of the Income-taxAct, 1961 for the purpose of arriving at the written down value ofthe block of assets, whether the Tribunal was correct in law torestrict the adjustment of the moneys payable in respect ofinsurance against the plant and machinery destroyed in fireaccident, to the cost of plant and machinery acquired during theprevious year instead of the whole of such moneys payable? AT THE REQUEST OF THE ASSESSEE “AT THE REQUEST OF THE REVENUE 1. In the facts and circumstances of the case and whileapplying the provisions of S.43 (6) (c) (i) (B) of the Income-taxAct, 1961 for the purpose of arriving at the written down value ofthe block of assets, whether the Tribunal was correct in law torestrict the adjustment of the moneys payable in respect ofinsurance against the plant and machinery destroyed in fireaccident, to the cost of plant and machinery acquired during theprevious year instead of the whole of such moneys payable? AT THE REQUEST OF THE ASSESSEE 2. Whether on the facts and in the circumstances of thecase, the Income-tax Appellate Tribunal was correct in law inholding that under the provisions of S.46 (6) (c) of the Income-taxAct, 1961, the receipt from the Insurance Company towardsclaim against damage to building, plant and machinery was to bereduced from the block to the extent of additions made to theblock of plant and machinery during the previous year inquestion?” 4. Sri S. Ravi, learned Senior Counsel for the applicant, submitsthat the scheme introduced through the Finance Act, 1998 is almost, aself contained code and every aspect was dealt with in detail, but theTribunal did not take the same into account. He contends that though theconcept of block assets was introduced, Parliament provided for retentionof the identity of the respective items forming part of the block assets, inthe process of arriving at the WDV, and the disposal of individual itemsthrough sale or damage or through restriction needs to be taken intoaccount, under Section 43 (6) (c) (i) of the Act. He submits that once thevalue of the items that were destroyed in a fire accident was available with the department, the only course open to them was to reduce theWDV to that extent and noting more. Learned counsel further submits thatthe question as to how much amount was recovered either from theInsurance Company or towards scrap value, is totally outside theconsideration of an assessing authority except in the limited context ofensuing that the reduction shall not exceed the WDV, which is increasedon account of the addition of new items in the concerned assessmentyear. He contends that the view taken by the appellate authority accordswith the provisions of the Act and the Tribunal was not justified inreversing it. Ultimately it is urged that both the questions deserve to beanswered in the negative. 5. Sri S.R. Ashok, learned Senior Counsel for the Income TaxDepartment, on the other hand, submits that the concept of block assetswas introduced with a view to ensure that the assets for which theidentical depreciation value is provided are put together, and just as thevalue of the items destroyed in a fire accident must be reduced, theamount recovered in that context, particularly, from the insurancecompany must be deleted in the process of arriving at the correct WDV. He further submits that a note of caution added under sub-clause (B) ofSection 43 (6) (i) needs to be taken note of and it clearly prohibits anyreduction in the WDV which emerges after the addition of the value of anewly added item. He submits that the Tribunal has taken the correctview of the matter and the reference itself was unwarranted. 6. Almost a new legal regime that was brought into existencethrough the Finance Act, 1998, and it constitutes the subject matter of thisreference. As observed earlier, in the context of depreciation underSection 32 of the Act, value of the individual items were to be considered. Recognizing the vast range of items that are acquired and purchased bythe industries, particularly, when the assessee is indulged in versatileactivities, the Parliament decided to group all the tangible assets on one hand, and intangible ones, on the other, into blocks. Within this, broadcategories, sub-grouping of items, on which same rate of depreciation isallowed, is required to be done, under the relevant provisions of law. 6. Almost a new legal regime that was brought into existencethrough the Finance Act, 1998, and it constitutes the subject matter of thisreference. As observed earlier, in the context of depreciation underSection 32 of the Act, value of the individual items were to be considered. Recognizing the vast range of items that are acquired and purchased bythe industries, particularly, when the assessee is indulged in versatileactivities, the Parliament decided to group all the tangible assets on one hand, and intangible ones, on the other, into blocks. Within this, broadcategories, sub-grouping of items, on which same rate of depreciation isallowed, is required to be done, under the relevant provisions of law. 7. The block assets of the applicant comprised of buildings, plant,machinery and the like, as defined under Section 2 (11) of the Act. It isnot in dispute that in a major fire accident that took place in the premisesof the factory, certain items, which formed part of the block assets weredestroyed. The book value of the items so destroyed was arrived atRs.68,06,562/-. The applicant had an insurance policy in respect of theitems that were destroyed in the fire accident. Obviously, by taking intoaccount the current market value, a sum of Rs.1,54,99,051/- was paid bythe insurer. 8. In the assessment year 1988-89, the return was in conformitywith the provisions of the Act and the details of block items, the value ofthe items that were destroyed in the fire accident and the amount that wasreceived in the insurance claim were furnished. It is also necessary tonote that an item of machinery costing Rs.1,38,03,407/- was added to theblock of assets, in that assessment year. The assessing authority tookthe view that once the applicant got a sum of Rs.1,54,99,051/- under aninsurance claim, that amount must be deducted from the value of theblock assets, whatever be the value of the assets that were destroyed inthe fire accident. The appellate authority took the view that irrespective ofthe amount, which the assessee may get either as scrap value orotherwise for any destroyed item, the deduction from the WDV can beonly of the value of the concerned items. 9. In the appeals preferred by the assessee as well as thedepartment, the Tribunal took the view, that the reduction in the WDV ofthe block assets must be equivalent to the value of the newly acquireditem, being Rs.1,38,03,407/-. 10. The concept of extending the benefit of depreciation on variousitems, is almost as old as the income tax law. Except for small variationas to the procedure or the extent of benefit, it is in vogue for the pastseveral decades. If an item of machinery or a vehicle or other asset isacquired by an assessee, depreciation upto the permissible limit isallowed. While in some cases it is a one time event, in others it is agraduated one. From the point of view of the income tax, the book valuegets reduced to the extent of depreciation. Instances are not liking, wherethe actual reduction in the market value of the asset is same as thedepreciation permitted under the law at the relevant point of time. Incertain cases, depending upon the nature of the item and the surroundingcircumstances, there may be appreciation also. 11. Before it stood omitted, sub Section (2) of Section 41 of the Actused to take care of such situation. Under this, if an assessee getsadvantage over and above the book value of an item of asset, thedifferential amount was liable to tax at the stipulated rate. That concept isnot in vogue now. 12. Though the blocking of items is provided for under the Act,distinction as to the working out of WDV is maintained for the assessmentyear 1988-89 on the one hand and for the subsequent years, on theother. For the assessment year 1988-89, the identity of the items, whichconstitute the block of assets, is maintained whereas in subsequentassessment years, it is blurred. This is evident from clause (c) of Section43 (6) of the Act, which reads as under: “43. ………. (6) ………. (c) in the case of ;any block of assets,-- 12. Though the blocking of items is provided for under the Act,distinction as to the working out of WDV is maintained for the assessmentyear 1988-89 on the one hand and for the subsequent years, on theother. For the assessment year 1988-89, the identity of the items, whichconstitute the block of assets, is maintained whereas in subsequentassessment years, it is blurred. This is evident from clause (c) of Section43 (6) of the Act, which reads as under: “43. ………. (6) ………. (c) in the case of ;any block of assets,-- (i) in respect of any previous year relevant to theassessment year commencing on the 1[st] day ofApril, 1988, the aggregate of the written downvalues of all the assets falling within that block ofassets, at the beginning of the previous year andadjusted,-- (A)by the increase by the actual cost of anyasset falling within that block, acquiredduring the previous year;asset falling within that block, acquiredduring the previous year; (B)by the reduction of the moneys payable inrespect of any asset falling within that;block, which is sold or discarded ordemolished or destroyed during thatprevious year together with the amount ofthe scrap value, if any, so, however, thatthe amount of such reduction does notexceed the written down value as soincreased; andrespect of any asset falling within that;block, which is sold or discarded ordemolished or destroyed during thatprevious year together with the amount ofthe scrap value, if any, so, however, thatthe amount of such reduction does notexceed the written down value as soincreased; and (C)in the case of a slump sale, decrease bythe actual cost of the asset falling withinthat block as reduced—the actual cost of the asset falling withinthat block as reduced— (a) by the amount of depreciationactually allowed to him under this Act orunder the corresponding provisions ofthe Indian Income-tax Act, 1922 (11 of1922) in respect of any previous yearrelevant to the assessment yearcommencing before the 1[st] day of April,1988; andactually allowed to him under this Act orunder the corresponding provisions ofthe Indian Income-tax Act, 1922 (11 of1922) in respect of any previous yearrelevant to the assessment yearcommencing before the 1[st] day of April,1988; and (b) by the amount of depreciation thatwould have been allowable to theassessee for any assessment yearwould have been allowable to theassessee for any assessment year commencing on or after the 1[st] day ofApril, 1988 as if the asset was the onlyasset in the relevant block of assets,April, 1988 as if the asset was the onlyasset in the relevant block of assets, so, however, that the amount of such decreasedoes not exceed the written down value;does not exceed the written down value; (ii) in respect of any previous year relevant to theassessment year commencing on or after the 1[st]day of April, 1989, the written down value of thatblock of assets in the immediately precedingprevious year as reduced by the depreciationactually allowed in respect of that block of assetsin relation to the said preceding previous year andas further adjusted by the increase or thereduction referred to in item (i).” 13. While sub-Clause (i) of Section 43 (6) (c) deals with theprocedure to be adopted for the financial year 1988-89, sub- clause (ii) deals with the subsequent financial years. A perusal of clause (i)discloses that if any item of asset, forming part of the block, is acquiredduring the previous year meaning thereby that the very assessment year,the cost thereof must be added to the WDV. Similarly, if any item whichformed part of block of assets, was sold or was destroyed during that veryperiod, the amount, equivalent its value must be reduced. The only rideris that the reduction should not result in the setting off the increase in theWDV on account of the addition of the value of an item, that is acquiredduring that year. 13. While sub-Clause (i) of Section 43 (6) (c) deals with theprocedure to be adopted for the financial year 1988-89, sub- clause (ii) deals with the subsequent financial years. A perusal of clause (i)discloses that if any item of asset, forming part of the block, is acquiredduring the previous year meaning thereby that the very assessment year,the cost thereof must be added to the WDV. Similarly, if any item whichformed part of block of assets, was sold or was destroyed during that veryperiod, the amount, equivalent its value must be reduced. The only rideris that the reduction should not result in the setting off the increase in theWDV on account of the addition of the value of an item, that is acquiredduring that year. 14. There is no dispute that the value of the items that weredestroyed in the fire accident was Rs.68,06,562/-. Clause (B) extractedabove indicates that irrespective of the value, which the assessee mayrecover as a consideration of sale or the scrap value, in the event ofdestruction, its value, meaning thereby, the one which is alreadyindicated in the books of account, must be reduced. It hardly becomesthe concern of the assessing authority as to how much the assessee getsas a consequence of the transfer or destruction of the item. TheParliament did not want to leave this aspect to be in the helm ofspeculation. 15. The amount, which the applicant got under the insuranceclaim is no doubt, phenomenal, compared to the book value of thedestroyed goods. The differential amount would certainly have becomesubject matter of exercise referable to sub-Section (2) of Section 41 ofthe Act, had that provision been on the statute. Once that provision hasbeen omitted, the assessing authority cannot be permitted to repeat theexercise thereunder, in the process of working out the WDV, underSection 43 (6) (c). It is well established that what is not permissible to bedone directly under law, cannot be permitted to be done indirectly. Another concept is that where law requires particular thing to be done ina particular manner it should be done in that manner or not at all. Gujarat Electricity Board v. Giridharlal Motilal[[1]]. 16. The appellate authority took the correct view of the matter inpermitting reduction in WDV only to the extent of Rs.68,06,652/-representing the value of the deduction. It needs to be kept in mind thatthe figure 68,06,562/- is not something which was furnished by theapplicant, as per its wish or fancy. It is usual or fancy, it was reflected inthe account books and assessments, and it is the result of allowing ofthe depreciation over the years, for those items. 17. The Tribunal made an attempt to increase the amount to bededucted; corresponding to the item of machinery that was acquired atthe relevant point of time. Obviously, the exercise was referable to thelast part of clause (B) of special clause (c) of Section 43 (6) of the Act. The expression, “reduction does not exceed the WDV as so increased”,appears to have been taken into account. What becomes relevant,however, is that the entire process of scaling down the WDV on accountof the sale or destruction of certain items, should not be permitted theoffset increase on account of the addition of the new items. It is nobody’scase that the reduction to the extent of Rs.68,06,652/- would offset thevalue in the increase of the WDV of the block assets. That occurred onaccount of acquiring of new items. Viewed from any angle, we do notfind any basis in the approach of the Tribunal. 18. We, accordingly, answer both the questions in the negative. As a result, the order passed by the Commissioner of Income Tax(Appeals) i.e. the appellate authority, shall hold good. 19. The Reference Case is answered, accordingly. There shall beno order as to costs. Miscellaneous petitions, if any, shall stand closed. ____________________ L. NARASIMHA REDDY, J ____________________ T. SUNIL CHOWDARY, J June 12, 2014. Note:L.R. Copy to be marked. B/O.KTL[1]1969 AIR 267